Macro Economy

Hindenburg showed skin in the game with report on Adani. It can’t be dismissed as ‘suspect’

Adani Group had the opportunity to disprove and discredit the report. The fact that they failed to only reaffirms the veracity of Hindenburg’s findings.

Praveen Chakravarty
February 8, 2023

File photo of Adani Group chairman Gautam Adani | Representational image | Twitter/@gautam_adani

File photo of Adani Group chairman Gautam Adani | Representational image | Twitter/@gautam_adani

Nearly 4,000 years ago, King Hammurabi of Babylon established Law 229, which said that if a builder builds a house and it collapses, causing the death of the resident, then the builder shall also be put to death. Hammurabi posted his set of laws in a public square for every literate person to read, and believed this law was necessary to ensure high-quality construction in his empire. Author Nassim Nicholas Taleb cites this nugget of history to explain his philosophy of ‘skin in the game’, an ethical principle of symmetric incentives. It is a seemingly simple but intuitively hard-to-grasp idea of an equal share of risks and rewards for all stakeholders in a transaction.

The ongoing Hindenburg – Adani saga can be viewed through this prism to explain some of the confusion and scepticism ascribed to Hindenburg’s motives.

Hindenburg Research, a US-based short-seller, published a voluminous research report that cast severe aspersions on the Adani Group’s operations and claimed in a shrill manner that Adani was the ‘biggest con’ in corporate history. But they didn’t stop there; they also revealed that they had placed a ‘big bet’ against the shares of Adani Group, and stand to gain if the shares drop in value. And the implied corollary, that they would lose all their money if they were proven wrong and the shares did not fall. In essence, Hindenburg put their money where their keyboard was.

Senior political leaders, public commentators and even economics professors in ivy league universities have questioned Hindenburg’s motives and argued that the report is just a facade to drive the price down and gain profits. They argue that Hindenburg published a fallacious and exaggerated report because the short seller made a bet against Adani shares and is not indulging in some act of investor protection. So, was Hindenburg’s revelation of its ability to profit from the report a case of ‘skin in the game’ or skewed motive?

How Hindenburg shook Adani

Let us suppose that a pure research entity or a media publication released the exact same findings. Their veracity would have still been questioned and, perhaps, dismissed even more quickly as a vested shoot-and-scoot operation, because these were mere agencies with nothing to lose but something to gain from the report. In fact, there have been several reports by research shops, or media stories in the past, that have highlighted some of the very same issues that Hindenburg has raised about the Adani group. Those were waved away nonchalantly, either through intimidation with the threat of a lawsuit, or labelling them as ‘easily motivated operations.’

Hindenburg’s transparent disclosure that it stands to gain financially if its report was taken seriously, or lose if it wasn’t, created symmetric incentives that established the credibility of the report. It was a signal to the market that they believed so strongly in the quality of their research that other Adani shareholders would be convinced to sell their positions, and hence, the stock price would fall. In Talebian terms, Hindenburg had ‘skin in the game’ in this transaction.

Hindenburg could have chosen one of many options in this case:

1: Publish a report without betting against the share price

2: Bet against the share price without publishing a report

3: Publish a report, take a bet but do not disclose their short bet against Adani shares

4: Publish the report, bet against the shares and be transparent.

Options three and four satisfy the ‘skin in the game’ condition, but option four also signals to the rest of the market about Hindenburg’s ‘skin in the game’, which was the option it chose.

Hindenburg’s report not ‘suspect’

To be sure, I am not for a moment arguing that markets are perfect and cannot be manipulated by mischievous reports. If any, I believe markets are more often imperfect than perfect. But to argue that Hindenburg’s motive is suspect because it stood to profit misses the entire notion of symmetric incentives because it also stood to lose its money if the market did not believe its report. Adani Group had the opportunity to disprove and discredit the report and cause a lot of financial ruin to Hindenburg. The fact that they failed to only reaffirms the veracity of Hindenburg’s findings, at least before the market.

It is common practice in the world of finance for investors to buy shares of a certain company and subsequently talk up that company in public to let the world know, so that they can benefit from a rise in its share price. This is an accepted norm, and it is left to the markets to either believe or disbelieve the greatness of that company. No one questions the motives behind this established practice. But even erudite people seem to struggle to accept the flip side of the same practice—to talk down a company in public and bet against its shares.

The idea that one can profit from a fall in the share price seems to be far more challenging to comprehend and accept for most people than the idea of profiting from a rise in the share price. This asymmetry of the human mind has been researched and documented in great detail by Nobel Laureate Daniel Kahneman and Israeli mathematical psychologist Amos Tversky, who called it “loss aversion”. Ethical philosophers may justifiably argue that it is worse to profit from someone else’s misfortune than from their fortune; hence, the two cannot be equated. But that is beyond the scope of this discussion.

Betting against a share or ‘short sell’ establishes symmetric incentives that are more credible. It is naïve and fallacious to argue that a ‘short sale’ induces perverse incentives, but a ‘long sale’ does not. The fact that Hindenburg could lose money if its report was wrong or rebutted easily, was actually the biggest signal of its credibility. Arguably, the exacerbated problem of ‘fake news’ in the modern world is, at its core, a problem of asymmetric incentives, where there is no punishment but ample reward and encouragement for false reportage in the guise of free speech. Establishing symmetric incentives, like in the Hindenburg example, can be a solution to stem the fake news malaise in society. But in this specific case, Hindenburg’s ‘skin in the game’ act removed Gautam Adani’s skin, metaphorically.

Praveen Chakravarty is a political economist and a senior office bearer of the Congress party. He tweets @pravchak. Views are personal.

(Edited by Zoya Bhatti)

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